Tuesday, April 14, 2009

A massive squeeze in its entire graphic glory - Citi arbs getting destroyed, with an all time loss of $12 per arbitrage block (7.31 common short/1 preferred long). Question to traders out there: is Goldman stock loan/repo asking for your C shares back? Actually, don't answer... that was rhetorical. But some advice to middle/back office guys: if you get a call from 212-912-xxxx, don't pick...It's not good news.

Also does it strike anyone as peculiar that the biggest financial company in the world is a plaything for market speculators?

All conspiracy guys: what happens if Citi/administration amends the exchange terms? Well, the government will effectively destroy a vast portion of the hedge fund community.

Would love to hear from Tyler, Mr. Squeeze, or anyone on the board an interpretation of what is happening to the worst financials. What's the play? Just a technical trade on penny stocks or is there a real belief that equity holders will somehow get paid out? On C, BAC, shouldn't be, but govt may find a way to do it, but how can govt engineer payouts to equity on AIG, FNM, FRE? It just seems too beyond the pale?

A while back, you suggested the citi squeeze could make volkwagon look like childs play. Might the whole financial sector be the squeeze (indirectly pulling the entire market), with the ultimate outcome similiar to what happened to VW?

I've never traded preferreds but we're using "arb" colloquially here, right? It was only an arbitrage if I believed a government/citi propaganda that put out the idea of converting at $3.25 and assiduously shorted out all my common deltas? If I had bought the preferreds naked on the thesis that I want to be on Tim and Ben's side then I'd have gotten almost 400% price appreciation on top of my 8.125% yield. Am I missing a subtlety there? Glad I found this blog I was getting sick of all the vague macro crap most people wax philosophical about.

Funny how when ALL THE SMART money piles into one side of the boat they end up getting tipped into the water . . . .

I'm not playing, but the odd thing about the major banks in 1Q 09 is that the reported earnings should be extremely good. Think about the net interest margin - courtesy of the Fed, the cost of funding is extremely low and due to the liquidity crunch rates on loans outstanding haven't come in nearly as much. And regarding lots of the Super Senior garbage that banks are carrying at 60-90 cents on the dollar while it's trading at 30 cents, BECAUSE the overcollateralization hasn't run out YET, many/most/all of the bonds are still paying 100 cents on the coupon(s). Strange maybe that so much soon-to-be impaired credit is paying 100 cents on the dollar. Since maybe under the new FASB ruling banks won't feel the pressure to mark assets held down to market (so credit losses won't be exhorbitant), the wide wide wide net interest margins might well fuel great earnings for a quarter - and what would be a completely fake rally in bank stocks as a result.

Thanks Mr. Squeeze, and the govt's ultimate end-game is? That the artifical short squeeze becomes self-fulfilling, reigniting the necessary 'confidence'? Or will there actually be a real payout to equity holders in the end? How do these 'fatties' actually continue operating and how does current equity get paid after everything that is senior to it on the balance sheet?

Even if you can't find C common to short, you can short the May calls (May 3.0 call is only about 10 cents over parity) and arb this.... if the exchange rate holds. Mkt is clearly saying the exchange rate WILL NOT hold.

IMHO everything about today shows this was an orchestrated squeeze. The underlying breadth in the market has been deteriorating for the past week, while major indicies have held in on the back of strength only in the most toxic low-dollar financials. The best trader on the street moved up their earnings release a day to be able to get the secondary off this morning... the secondary broke offer price. Finally, the majority of the move in Citigroup and the rest of the zombies occurs on the overnight gap and morning buy-in. After the weak shorts and arbs are pushed out , things subsequently normalize. Financials are about to fall off a cliff....The strong hands were the sellers today.

I unfortunately am in the Citi arb trade, and my cost is 100% annualized net short stock interest right now through Thinkorswim. Thankfully I only committed a very small amount of capital to this trade (wanted to try capital structure arbitrage; got my learning experience!). Hopefully this thing converts soon so it can be over with!